Big changes are coming to employee ownership trusts (EOTs). With new rules around control, residency requirements, and monitoring periods, many business owners are wondering what this means for their exit plans.
We know these changes can seem overwhelming at first glance. That’s exactly why the team of expert accountants at Williamson & Croft have broken down the six key updates into clear, practical explanations – so you can understand exactly how they might affect your business.
Whether you’re actively planning to sell your business to employees or just exploring your options, here’s everything you need to know about the EOT changes.
1. Restrictions of control
The government has introduced a new ‘trustee independence requirement’ to prevent former owners from maintaining control after selling their business.
Under the new rules, former owners and their connected persons (e.g. family members) can’t make up more than 50% of the trustees. This ensures a serious and meaningful transfer of control to employee ownership rather than just a transaction on paper.
If this requirement is broken within the first four years, all of the tax benefits given to the former owner could be completely taken away.
Why has this been introduced?
To prevent business owners from claiming tax benefits while effectively keeping control of their companies by stealth. This ensures that EOTs are truly employee-owned rather than just a vehicle for tax breaks for business owners.
2. UK residency requirement
The trustees of an EOT must be UK residents from the point the company is first sold to the EOT and then for the next four tax years.
Breaking these residency rules in the first four years comes with the serious consequence of the tax relief being removed for the seller. After this period, any breach could have tax implications for the EOT itself.
There is one practical exception: temporary breaches are allowed only if caused by a trustee’s death.
Why has this been introduced?
To ensure EOTs remain within the UK for a meaningful period after the sale, preventing offshore arrangements that could be used to avoid paying tax in the UK.
3. Fair market value assessment
Trustees now have a legal obligation to ensure they’re paying a fair market price when buying company shares.
This includes:
- Taking reasonable steps to verify the company’s value
- Ensuring any interest on deferred payments (when the purchase price is paid over time) stays within reasonable commercial rates
- Documenting the business valuation process
This protects both the employees’ interests and prevents inflated valuations that could be used to exploit tax benefits.
Why has this been introduced?
To prevent abuse where companies are sold to EOTs at artificially high prices to maximise tax-free gains for the selling owners whilst potentially burdening the employee-owned business with excessive debt.
4. Extended monitoring period
The government has extended the period they monitor EOTs from one year to four years after the sale.
As with the other changes, during this time if any EOT rules are broken the seller’s tax relief can be withdrawn. Important changes must be reported during this period.
Why has this been introduced?
To prevent temporary EOT arrangements designed purely for tax advantages, ensuring companies maintain genuine employee ownership for a meaningful period of time.
5. Flexible bonus arrangements
Companies can now exclude directors when awarding tax-free bonuses to employees.
This change allows companies to separate directors’ bonuses from the general employee bonus scheme. This should make incentives for employees simpler to manage and makes sense as directors usually have their own separate bonus arrangements.
Why has this been introduced?
To make it easier for EOT-owned companies to reward their regular employees without being forced to include directors in the same bonus schemes.
6. Enhanced reporting requirements
Starting from 6 April 2025, individuals claiming Capital Gains Tax relief must provide more detailed information in their claims.
This means telling HMRC exactly what you received for your shares (whether paid straight away or over time) and how many employees were at the company when you sold it. These reporting requirements help authorities keep track of EOT transactions and ensure compliance with the new framework.
Why has this been introduced?
To give HMRC better oversight of EOT transactions in order to collect data and monitor how effective the scheme is. In turn, it will also help prevent abuse and inform future policy decisions.
Interested in exploring EOTs? We can help
While these changes might sound daunting, they’re only intended to tighten up the misuse of employee ownership trusts.
Get in touch to speak with our our expert team at Williamson & Croft about how these changes to EOTs could affect your plans. If you need guidance navigating the new rules, we’re here to help you make informed decisions.